C&EN
special report
DAVID M. KIEFER, Senior Editor Chemical and Engineering News, Washington, D.C.
Canadian Chemicals Owned largely by foreigners, dependent on foreign technology, and relying heavily on foreign trade, the Canadian chemical industry wonders if it ever can become really Canadian. Although the description of the industry is not likely to change soon, changes are in the offing as Canadian producers strike out more on their own in an effort to shed the industry's not-made-in-Canada image
Source: Dominion Bureau of
Statistics
An Industry in Search of Identity Gradually and without fanfare, but with considerable soul searching and just a bit of trepidation, Canada's fast-growing chemical industry is en tering a vital stage of its development. If the move is carried through—and it is still too early to be certain that it will be—Canada may find one year soon that its chemical industry finally has been molded in a Canadian image. On the surface, perhaps, the industry may look little different than it does today. Its business policies will have changed, however, as well as its way of thinking. Some industry leaders insist that chemical production in Canada already has taken on a distinctive flavor of its own. The industry—the Free World's seventh largest—ranks fifth among Canadian manufacturing industries in assets and sixth in sales. It is largely self-sufficient in many big-volume, lowcost industrial chemicals, as well as in such consumer chemical products as paints, detergents, and explosives. The industry's rate of growth during the postwar years has been about 50% greater than that for Canadian manu facturing as a whole. It boasts its own trade association, the 44-member Canadian Chemical Producers' Asso ciation formed in 1962. (Most lead ing Canadian chemical firms also are active in the U.S.'s Manufacturing Chemists' Association.) Management of its foreign-controlled companies more and more has taken on an in digenous cast. Be that as it may, a disinterested I Because of the fluctuating rate of I exchange between Canadian and U.S. dollars, all Canadian money figures in this report are given in Canadian dollars.
observer still tends to assay the Ca nadian industry on the same scales that he would use for its counterpart in the United States. Often, it seems, officials of Canadian companies self consciously tend to do likewise. Atti tudes bred of a branch-plant economy aren't easily shaken off. Two Roots Canada's chemical industry stems largely from two distinct roots. Much of it is based on Canada's bountiful resources, either directly or indirectly. It is tied to cheap and abundant hydroelectric power (Shawinigan Chemicals at Shawinigan, Que.; Electric Reduction at Buckingham, Que.; Cyanamid of Canada at Niagara Falls, Ont.) or to the waste sulfide gases emanating from smelters (Allied Chemical at Valleyfield, Que.; Cana dian Industries at Copper Cliff, Ont.; Consolidated Mining at Trail, B.C.). Or it supplies chlorine and caustic soda to the pulp and paper industry, sulfuric acid to make fertilizer needed by farmers, explosives and flotation agents used in mines and smelters. Probably the first chemical plant of significance in Canada was a twochamber sulfuric acid works put up at London, Ont., in 1867, the year of Canada's birth as a nation, to serve the fledgling oil refining industry in southern Ontario. The progress of this part of the industry hinges on export markets— either its own or those of the industries it serves. Its eyes are turned outward rather than inward toward domestic consumers. Consequently, it tends to be little concerned with protective tariffs. A second part of the chemical in dustry got its start primarily by filling
Production. This purification unit is part of Chemcell's Edmonton plant that produces petrochemicals DEC. 13, 1965 C&E Ν 109
domestic consumer demand. It is based, for the most part, on foreign capital and foreign technology. Typically, it springs from branch sales offices of foreign producers, reselling imported products until the market is big enough to justify an investment in Canadian manufacturing. Despite foreign control, this segment of the industry tends to look inward. It has sought tariff barriers as a bulwark against foreign competition. The reason is simple. Because Canadian plants generally are smaller, frequently they aie less efficient. Thus manufacturing costs tend to be higher in Canada than in the U.S. Canada's home markets alone generally are not big enough to support large-scale production in low-cost plants. They are within easy reach, too, of a U.S. industry geared to produce for markets 10 to 20 times larger than those north of the border. The Diseconomies of Scale "The classic problem in Canada," says Monsanto Canada president Jack Glatthaar, "is the market that is big enough for half a plant but not a full plant or the one big enough for a plant and a half but not for two or three competing facilities." "What has happened too often in Canada—and may be happening again—is that too many people have built too many plants that were too small. They end up all competing with inefficient plants for the same customers," adds J. C. Langford, president of Chemcell's Canadian Chemical Co. division. Examples are easy to find. Monsanto Canada's maleic anhydride plant at La Salle, Que., can make 5 million pounds a year. That's less than a 10th of Monsanto's capacity at St. Louis. Consequently the Canadian plant can't compete effectively in foreign markets. But the plant, built to supply a polyester market that did not develop as fast as expected, can furnish twice as much product as the Canadian market currently needs. And because of the duty imposed since Monsanto started making maleic in Canada, Canadian users often have had to pay a higher price for the product than they would have 110
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if they had been able to buy it freely on the world market. Allied Canada's toluene diisocyanate plant at Corunna, Ont., was designed when TDI was selling at 75 cents a pound; Allied figured the price eventually would drop no lower than about 60 cents. The plant can produce 5 million pounds a year, about a fifth the capacity of the smallest U.S. plants. Since the plant was completed early last year, the price of TDI has skidded from close to 70 cents to about 40 cents a pound, and despite a 20% tariff, imports (both of TDI itself and of urethanes) continue to pose a problem. Net result: A $4 million investment turned into a marginal operation before it was two years old. The market for methanol in Canada has climbed to about 10 million Imperial gallons per year. That's enough to keep Canadian Chemical's plant at Edmonton, Alta., operating satisfactorily. This year, though, two new plants (Imperial Oil somewhere in eastern Canada and a second Canadian Chemical plant at Cornwall, Ont. ) are on the drawing boards. Asks an official of another eastern chemical firm which had considered building a plant: "But where are they going to find the customers?" Similar tales can be told regarding other products, among them formaldehyde, phenol ("it's coming out of our ears," says one Canadian producer) , and hydrogen peroxide. When to Build Canada's $2 billion market for chemicals provides little room for maneuvering and little built-in flexibility. It poses some tricky problems in timing market entry and in marketing strategy. Mistakes can be costly. U.S.-owned subsidiaries, for example, usually prefer to import new or small-volume products from their parent companies for resale in Canada. This type of business accounts for a profitable 15 to 20% of the sales of a typical U.S. affiliate operating in Canada's chemical industry. However, once a market for the product begins to build up, the affiliate must consider manufacturing in Canada, even though volume still may be too low to support a plant of optimum size. If the
affiliate doesn't, it can be sure someone else will. "There is much more of a competitive scramble for markets now," says Du Pont of Canada treasurer K. M. Place. "Usually, you no longer can wait until the timing is just right for producing a new product in Canada. If you do, you find that somebody else has moved in first." "When a new product comes along that looks like a winner, the first thing you know two or three firms have jumped into the market, each with enough capacity to fill the entire domestic demand," adds Cyanamid of Canada president S. R. Stovel. "That's when the company with the most imaginative marketing program takes the lead." Polyethylene is a case in point. Output has increased by about 50% since 1962 and this year should be neatly in balance with the 200 million pound current capacity of Canada's four producers. But only because they are able to export more than a fourth of their production, largely to Hong Kong and other British Commonwealth nations. (Imports, mostly from the U.S., totaled 27 million pounds in 1964.) But it's difficult to export at a profit from Canada's plants, the biggest of which is Union Carbide's 100 million pound-a-year unit (now being expanded to 120 million pounds) at Montreal. "Now you have to have a plant capable of turning out 300 to 500 million pounds a year to compete in the same league as the big international polyethylene producers," Carbide president John S. Dewar points out. "But how can you justify that kind of a plant in Canada, where the domestic market just isn't big enough and an adequate supply of cheap hydrocarbons isn't readily available?" Says an executive of another firm which once seriously considered making polyethylene: "The cream is gone. It's not even milk anymore, only water." The current construction boom may breed another crop of market problems. Canada's demand for acrylonitrile-butadiene-styrene resins, about 8 million pounds this year, has attracted three producers: Polymer Corp.'s plant went on stream at Sarnia, Ont.,
Canada Looks to Five Years of Continued Economic Growth Will polypropylene follow the same pattern? The domestic market of about 10 million pounds a year is still supplied solely by imports, and the resin has had a tough time competing with high-density polyethylene north of the border. Several firms, nevertheless, have eyed the market with interest. Dow of Canada, in fact, announced plans to build a polypropylene plant a couple of years ago and has even completed engineering work for it. The company still has not broken ground, however. "Market conditions aren't right yet," Dow president L. D. Smithers admits, "and our enthusiasm has dimmed." As Canada's largest consumer of polypropylene—using about 5 million pounds a year for spinning fibers—Chemcell is another potential producer. But Chemcell figures that it couldn't come close to using the output of an entire plant, and it claims to have no intentions at present to make the resin. A competitive plant today would have to have a capacity of at least 25 to 30 million pounds a year—and the Canadian market is a long way from that level. The Lure of Exports
Sources: Dominion Bureau of Statistics; Economic Council of Canada estimates
two years ago. Now Monsanto is building a plant at LaSalle. Marbon is starting up one at Cobourg, Ont., for coloring and compounding resin shipped in from its West Virginia plant (Marbon expects to make resin itself at Cobourg eventually ). Each of these producers probably is capable of filling the domestic market entirely by itself. "It's going to be a struggle," admits Charles McKenzie, assistant to the president of Polymer. "We are looking to an expanding market for ABS to take up any slack." Domtar, the only present Canadian producer of phthalic anhydride (Reichhold Chemicals has a plant which has been shut down since
1961), soon will run up against competition from W. R. Grace. Domtar (formerly Dominion Tar & Chemical Co. ) can make 25 to 30 million pounds a year—not quite enough to meet total Canadian demand of about 35 million pounds; imports last year totaled about 15 million pounds. Grace, which acquired Canadian plasticizer producer Howards & Sons last year, will double Canadian capacity for phthalic when its Hatco Chemical division completes a new plant at Cornwall, Ont., next year. (Other Grace divisions make products ranging from petroleum catalysts to packaging films and maintenance chemicals in seven other plants in Canada.)
One solution, of course, is to put up economically scaled plants with a capacity well in excess of Canadian demand, run them at capacity, and try to export the extra output. This works well sometimes. Polymer Corp., Canada's only synthetic rubber producer, offers a classic example. Its Sarnia, Ont., facilities, originally built to supply World War II requirements, can produce more than twice as much synthetic rubber as the Canadian market consumes. So Polymer feeds about 70% of its output into foreign markets, mostly in Europe. Polymer found that operating as a Canadian producer with no rubber fabricating operations of its own has worked to its advantage in selling overseas. Since 1958 it has increased its sales by 50%. Reliance on exports can be worrisome. Competition has grown rougher in world rubber markets. As European countries become more self-sufficient, Text continues on page 114 DEC. 13, 196 5 C&EN
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Canada's Economy—Bustling But Different Canada's population of just under 20 million is one tenth that of the United States. It's an easy rule of thumb, therefore, to describe Canada in terms of its southern neighbor, divided by 10. Like most easy rules of thumb, unfortunately, this one just doesn't stand up. Gross national product and personal income, for example, are 14 to 15 times higher in the U.S. than in Canada. On the other hand, the U.S.'s foreign trade is only three to four times as great. Canada's chemical industry, meanwhile, is little more than a twentieth that of the U.S. if measured in terms of the value of factory shipments. Yet its imports of chemicals are about 6 0 % those into the U.S. The U.S.-by-a-10th rule is even more misleading on another score. For it implies that Canada is merely a reflection of the U.S. viewed through the wrong end of a spyglass. This is a gross oversimplification. It is true, to be sure, that Canadians generally drive the same makes of cars, read many of the same magazines, and use the same toothpaste as do Americans. They watch many of the same television programs, beamed in their direction by stations located conveniently just south of the border. Most of them speak the same language, down to the same slang and profanities. The chemicals they consume are largely made by firms with familiar sounding names: Du Pont, Carbide, Cyanamid, Dow, Allied, Monsanto. In short, the economic and cultural tug southward is strong. But beneath the surface Canada is different. The country has been described as a triumph of politics over geography and economics. Politics, geography, and economics combine to pose problems not faced by business south of the border, problems which require solutions peculiar to the Canadian environment. • Canada's markets stretch in a narrow ribbon, 3000 miles long but rarely more than 100 miles or so wide, strung out along the fringe of the international boundary within easy reach of U.S. suppliers. • Its 20 million people form a market frequently too small to support manufacturing industries economically, especially within the shadow of the giant industries just to the south. Small as it is, moreover, the Canadian market is fragmented. About two thirds of it lies along the Quebec City-Windsor, Ont., axis. From there it is a long way to the smaller and relatively isolated markets of the western provinces. • Canada's industry—especially its manufacturing industry—is largely owned by foreigners, mostly U.S. residents. Well over 5 0 % of the total assets of Canada's manufacturing and mining industries are controlled by nonresidents. In such important industries as chemicals, mineral fuels mining, transportation equipment, and petroleum and coal products, corporations in which a majority interest is held by nonresidents own from 7 5 % to as high as 9 9 % of the total assets. Probably no other industrialized nation of the world has so much of its industry controlled from outside the country. • Canada, too, is one of the least self-sufficient of industrialized countries. One recent study indicates that Canadian manufacturing supplies only a little more than 7 0 % of the domestic market for manufactured goods, including only about 5 0 % of the
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market for motor vehicles and about two thirds of that for chemicals. Moreover, Canada is no more selfsufficient in manufacturing now than it was a quarter of a century ago. • Canadians depend on exports of goods and services for a fifth of gross national product. Yet they are faced with a chronic balance of payments problem. Although since 1961 Canada has managed to keep exports of merchandise in balance with or a bit ahead of imports, reversing the experience of the late 1950's, it continues to run up a big deficit in services. The over-all deficit in its current accounts, however, has been more than met by an inflow of investment funds. • Its most important trading partner by far is the United States. Last year the U.S. was the outlet for nearly 6 0 % of Canada's exports of goods and services. It also supplied almost 70% of Canada's imports. Canada's deficit in trade with the U.S. totaled $1.66 billion. At the same time Canada was running up a favorable balance of $1.2 billion in trade with the rest of the world. Faced with these economic facts of life, Canada finds itself on the horns of several dilemmas. It must look outward. Its prosperity hinges largely on exports. But to find trading partners it must buy abroad as well as sell. Thus there is a strong tradition favoring liberal trade policies. Yet it feels a strong urge to look inward, to build up its own manufacturing capacity. Much of its secondary manufacturing industry contends that it must be shielded from outside competition by tariff barriers if it is to survive. Canada has long relied on outside capital (and technology) to build its industry. It doesn't generate enough of its own. Yet many economists and businessmen fear that outside investment will engulf the Canadian economy. If it does, Canada may lose its political independence and national identity as well. Canadians are intent on shaking off their image (which was accurate until World War II) as a nation of fishermen, hewers of wood, miners of ore, and tillers of the soil for the rest of the industrialized world. Two years ago the Canadian government established a Department of Industry, charged with aiding the development of more efficient manufacturing industries. Like its southern neighbor, Canada in the past five years has enjoyed unprecedented prosperity. (The business cycle in Canada tends to follow the pattern in the U.S.) Since 1960, gross national product has increased at an annual rate of 7% a year (the rate has been 6% a year in the U.S.) in current dollars. In real terms (eliminating inflationary factors) the rate has been nearly 5.5% (in the U.S., nearly 4.5%). Last year alone GNP shot up by 9 % to $47.0 billion in current dollars and 6.5% in real dollars. This year, according to government experts, the economy should turn in another gain of close to 9 % , pushing GNP to about $51 billion, with inflation accounting for about 2 % of the rise. Other economic measures also make pleasant reading. Unemployment, which had climbed almost to 8 % of the total labor force during the winter of 1960-61, dropped this summer to less than 4 % . Industrial production last year was 9 % ahead of 1963 and up
2 7 % from 1960. This year it is running nearly 7 % ahead of 1964. Total capital outlays are estimated to hit a record $12.8 billion this year (including government, institutional, and housing expenditures), up nearly 19%, on the heels of a 15% rise for 1964. Exports, perhaps the one weak spot in the healthy economy, were given a big boost this summer by sales of $450 million worth of wheat to the U.S.S.R. and will be further buttressed in the next couple of years by wheat sales to Communist China. As in the U.S., the greatest worry now seems to lie in the threat that rampant prosperity may breed inflation. The long-range outlook, too, is bright. The government-sponsored Economic Council of Canada, in a detailed report issued at the end of last year, set 5.5% as a goal for the annual rate of growth for gross national product until 1970. (The long-term historic rate, in constant dollars, has been 3.3%.) Some economists think that even this goal is too low. Du Pont of Canada economist R. B. MacPherson, for one, argues that the Canadian economy should be capable of maintaining a 7%-a-year expansion during the next few years. Canada's chemical industry has been caught up in the current boom. Factory shipments of chemical products last year totaled nearly $1.8 billion, up 9 % , with industrial chemicals (which account for about a third of the total) rising 1 1 % and plastics and synthetic resins 9 % . This year shipments will show another good gain and should come within striking distance of $2 billion for the year as a whole. The industry's confidence is underscored by a phenomenal splurge in capital spending this year. Investment in new plant and equipment for producing chemicals is expected to total nearly $300 million, nearly double what was spent in the previous peak year of 1957 and about 120% more than was spent in 1964. Only the pulp and paper industry, with outlays slated to top $475 million, and primary metals, with $305 million, will be spending more. The biggest share of this year's outlays in the chemical industry will go for facilities to make industrial chemicals; spending on industrial chemical expansion will run to
about $180 million, according to the Dominion Bureau of Statistics, about 140% more than went into similar facilities during 1964. Other sizable investments are being made for mixed fertilizer capacity and plastics and synthetic resins; outlays in both areas will approximately double those of the previous year. Such a sudden burst of spending, of course, raises the specter of excess capacity. Many chemical industry executives insist that overcapacity has not been a major problem for chemical producers, at least in the past couple of years. They are concerned, though, that the current build-up may push operating rates down to a less economic and profitable rate until the industry has had a chance to digest the expansion. Already costs incidental to construction have had an adverse effect on industry earnings, which during the first half of 1965 were only slightly ahead of those of the year before. Today's determined plant builders, of course, are looking beyond today's markets. They expect that demand for chemicals in Canada will continue to outpace the growth in the economy as a whole. Most chemical industry analysts see the market for chemicals expanding by a rate of at least 5.5 to 6 % a year during the next five years. If the over-all economy reaches the Economic Council's goal of 5.5% annual growth, chemical demand should expand by 8 % a year or close to it. With a 7 % growth rate for gross national product, annual growth in demand for chemicals could speed up to a 9 or 1 0 % clip. By 1970, then, consumption of chemicals in Canada is likely to be $3 billion or perhaps a bit more, higher by a half than what it is this year. Plastics, petrochemicals, and synthetic fibers look like the most promising growth areas within the chemical industry. Demand for plastics, for example, is likely to increase at an annual rate of 10 to 1 2 % , maybe even faster. For petrochemicals and fibers a growth rate of 9 to 1 0 % a year seems reasonable. And some industry sources look for an 8- to 10%-peryear build-up in use of fertilizers, another segment of the industry likely to enjoy better-than-average expansion.
How Canada measures up to the United States.. «
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Polymer finds itself more vulnerable Largely because of falling prices, botl its profits and profit margins have de clined in the past four years. To maintain its position in work markets, Polymer in the past fou: years has built small plants in France (to make specialty latexes) and Bel gium (to make butyl rubber). Il also has invested in synthetic rubbei producers in South Africa and ir Mexico. However, Polymer's entry into the plastics business with its line of ABS resins is its biggest departure to date from its long-standing role in the rubber business. The initial impact on its operating results is small, but the move could set the stage foi further diversification. While ABS resins fit in well with Polymer's background in polymer chemistry and capitalize on its position as a producer of styrene and butadiene, now Polymer is being forced to build up new marketing skills. Canada's fertilizer producers also customarily have set up their plants with their eyes on export markets, especially in the U.S., as much as—if not more than—on consumption at home. American Cyanamid's first plant anywhere was built in 1907 at Niagara Falls, Ont., to make calcium cyanamide for fertilizing U.S. farms. (The Niagara plant is the only one in North America now making the product. ) Cyanamid for a long time looked on Canada more as a site for manufacturing nitrogen-based products for sale in the U.S. than as a market in itself. As its U.S. parent diversified, Cyanamid of Canada (formed in 1958) has focused its interest more on home markets. Now exports account for only about 35% of its total volume. Yet with a new $17 million nitrogen and fertilizer complex capable of making 700 tons of ammonia and 300 tons of urea a day now being completed at Welland, Ont., Cyanamid's interest in sales to the U.S. market is not apt to diminish. The 1000 ton-a-day ammonia plant slated for completion by Canadian Industries, Ltd., late next year in Canada's "chemical valley" along the St. Clair River south of Sarnia also is designed with U.S. farmers in mind. CIL, Canada's largest and most diversified chemical producer, is spending $50 million on the giant facility and its associated nitrogen and phosphate fertilizer units. Initially, economic operation of the plant calls for 114
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Further Strong Growth Likely In Canada's Chemical Market
shipping a quarter to a third of its output south of the border. Dow also has expanded its ammonia plant at Sarnia to a capacity of more than 500 tons per day. One observer figures that the new nitrogen capacity soon to be available in southern Ontario could drown all of that region's arable land under a quarter inch of liquid ammonia. If the Sarnia fertilizer complex pays off, CIL is likely to expand further into fertilizers and consecmently will become even more interested in exports. At present, though, exports provide only about 7% of ClL's total sales. Most major Canadian chemical producers also get only a modest, though significant, share of their business from abroad—15% each for Du Pont and Dow, 25% for Shawinigan Chemicals, 10 to 15% for Union Carbide. Other firms, like Monsanto and Allied, have very little export busness. Some people close to the industry maintain that exports would be higher if the U.S.-owned subsidiaries had more freedom to sell abroad in competition with their parents. British preferential tariff rates do give Canadian firms a certain advantage in shipping into the United Kingdom or to Commonwealth countries. Often, too, Canadian firms can draw on the services of the far-flung international
trading organizations of their U.S. parents. But as U.S. firms widen their overseas manufacturing operations, their Canadian subsidiaries may find their export business further curtailed. Lower
Profitability
In general, firms operating in Canada are less profitable than U.S. or even European chemical companies. For one thing, the producer looking for nationwide distribution finds shipping costs are high in a market that is more than 3000 miles long but only 100 to 200 miles wide. In addition, construction is more expensive for a plant designed to operate in a cold climate, especially if process equipment must be imported. Services and administrative overhead are higher per dollar of sales when the total market is smaller, too. Most of the blame for lower profitability, though, is laid to the small size of Canada's chemical plants and the competitive scramble in its markets. Industry-wide earnings data for Canada and the U.S. are probably not strictly comparable. Dominion Bureau of Statistics data indicate that Canadian chemical firms' earnings before taxes were 9% of sales last year; pretax profits of U.S. firms were 14%
of sales, according to Securities and Exchange Commission figures for the same year. Company-by-company comparisons show a mixed pattern. Du Pont of Canada earned 9.1% on sales and 18.2% on net worth in 1964; for its U.S. parent, net operating income (exclusive of General Motors dividends) was higher at 12.2%, but its 16.7% return on net worth was lower. Conversely, Chemcell's net per dollar of sales, at 11.0%, was higher than parent Celanese's 7.8%, but its return on net worth of 11.6% was lower than its parent's 12.7%. Union Carbide Canada, which netted 9.1% on sales and 13.9% on net worth in 1964, trailed both the 10.1% on sales and 15.3% on net worth tallied by Union Carbide in the U.S., but the gap between parent and subsidiary has been narrowing. Not all industry analysts are convinced that profitability in Canada's industry must necessarily be lower than that of the U.S. Nor do they agree that poorer performance should be blamed, as it traditionally is, on small-scale, high-cost plants and higher marketing expenses. "The argument is overworked," claims one. "After all, in the U.S. many small or regional firms compete successfully with the giants, and the biggest producers
are not always the most profitable there. Why not in Canada? Sometimes Canadian industry seems overly self-conscious of its smallness, falling back on it as a convenient scapegoat." Canada does have some factors working in its favor. Wage rates are lower than in the U.S., for one thing. Hourly earnings averaged $2.25 for Canadian chemical workers last year, only about three fourths the average rate paid production workers in the U.S. industry. Yet productivity of Canadian workers probably is just as high. Canada's foreign-owned or affiliated companies, too, can draw on the vast research and engineering capabilities, as well as the marketing and managerial skills, of their parents. Canada's chemical industry spends only about P / 2 % of its sales income on research and development, less than half the rate of its U.S. counterpart. "One of our strengths," says a spokesman for the Canadian industry, "is our ready access, at bargain prices, to outside R&D. Technology flows easily across the border. But we don't have to buy the failures, only the successes. We just have to be skilled enough to apply intelligently to our special circumstances what we buy." All U.S.-owned companies in Can-
Capital Outlays in the Chemical Industry Rise Sharply
Source: Dominion Bureau of Statistics
"Intentions
ada rely heavily on their parents' R&D efforts (although they sometimes have to pick up part of the tab for work done in the U.S.). Some Canadian subsidiaries, in fact, handle little more than technical service in their own labs. They figure that Canada is far too small to support a full-fledged R&D establishment—or even a limited one. "There's no point to spending money on R&D only to duplicate what is being done abroad," says the official of one company. "It's wasteful to do fragmented, halfhearted, smallscale research. Even if we were lucky enough to score a breakthrough somewhere along the line, we would end up having to exploit it elsewhere first, because of the size of the Canadian market. For that matter, too, Canada's needs don't differ much from those in the U.S." Not all executives agree, especially with the last point. Some companies already have set up research establishments of respectable size in Canada. CIL is spending about $7 million a year for R&D; Du Pont $4 to $5 million; Polymer Corp. more than $3 million. Several U.S.-owned firms, too, have been stepping up their R&D activities, although more to adapt products and processes to Canadian needs than to do fundamental research. Production for the Canadian market often is practical only when a process is scaled down specifically to Canadian volumes or if flexibility is engineered into the plant so that it can make a broad range of products. Du Pont's research center at Kingston, Ont., for example, modified U n developed processes in designing plants to produce acrylic and spandex fibers in Canada. It also developed a flexible process for turning out polyethylene resins of a wide range of densities in a single low-pressure-process plant which Du Pont built at Corunna, Ont. Dow, meanwhile, finds Canada a good proving ground for new processes. In addition to having a relatively large long-range research group at Sarnia, it has a large development group working on processes tailored to Canada's market environment. Dow also does some of its corporate pilot plant work there; a pilot plant often is big enough to supply the entire Canadian demand for a new product for several years. When Dow developed in the U.S. a new DEC.
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method for making phenol by oxidizing toluene, it tried the process first by building a plant at Vancouver, B.C., before putting up much larger plants in the U.S. and the Netherlands. Many Canadians, both within and outside of the government, are displeased with Canada's great dependence on imported technology. R&D, they contend, goes hand in hand with economic progress and the evolution of a balanced society. Unless greater amounts of research are undertaken, Canada will fall behind the rest of the world in technological competence and will find itself at a disadvantage in export markets. Its domestic needs may be ill served, as well, and its college graduates will leave for lack of opportunity. These fears have caused the Canadian government to provide incentives, such as contracts, grants, and tax advantages, to spur R&D outlays. These incentives have encouraged many firms to increase their efforts, at least by moderate amounts. If nothing else, they make it easier to sell U.S. parents on doing more R&D in Canada. Electric Reduction Co., for example, says its outlays have about doubled in each of the past two years, largely as a result of government incentives. ERCO, a wholly owned Canadian subsidiary of Britain's Albright & Wilson, now acts as a center for all of Albright & Wilson's R&D on pulp and paper. "The traditional philosophy regarding R&D in Canada has caused most of our technology to be based on U.S. developments geared to U.S. resources," says ERCO president E. R. Kinsley, a Canadian-born physicist-turned-administrator who worked in the U.S. before returning as ERCO executive vice president three years ago. "What we need now is technology with a higher Canadian content and based upon Canadian raw
Canada's Chemical Industry Is One of the Most Heavily Dominated by Foreign Owners Per Cent of Industry Assets More than 50% Owned by Nonresidents, 1962
Printing and publishing Beverages Furniture and fixtures Leather products Wood products Textile, knitting, and clothing Food manufacturing Paper products Other mining Nonmetallic minerals Metal fabricating Metal mining
10.9% 13.3 21.5 27.1 28.0 30.7
All Manufacturing and Mining Primary metals Machinery Miscellaneous manufacturing Electrical products
58.3
31.2 40.9 48.1 51.1 51.3 52.4
60.2 63.7 64.6 66.6
CHEMICAL PRODUCTS
76.4
Mineral fuels mining Transportation equipment Tobacco products Rubber products Petroleum and coal products
83.9 84.2 85.3 92.0 99.3
Source: Corporations and Labour Unions Returns Act Administration
One of the most common complaints leveled against U.S. domination of Canadian industry centers on the reluctance of U.S. subsidiaries to undertake full-scale research in Canada. Many people contend that more U.S. firms could readily transfer at least part of their R&D efforts to Canadian laboratories. Another frequent complaint is that U.S. parents thwart Canadian trade policy by restricting the export efforts
Profitability and Growth Among Five Major Chemical Producers Earnings Earnings Before Taxes, Before Taxes, Per Cent of Per Cent of Net Sales Net Worth 1962-64
Chemcell (1963), Ltd.» Du Pont Canada Union Carbide Canada Polymer Corp. Canadian Industries, Ltd. «Pro forma. Sources: Company annual reports
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20.4% 19.3 18.0 15.9 8.4
20.4% 36.9 25.1 18.6 17.0
Per Cent Increase, Average 1958-60 to 1964 Net Earnings Sales Before Taxes
80.5% 89.3 40.7 54.0 38.3
169.5% 149.3 52.5 7.7 81.0
of their Canadian subsidiaries, not only in the U.S. market but in competition with U.S. output in overseas markets as well. "How can Canada develop the chemical export business it needs," grumbles one businessman, "when every move depends on decisions from a foreign home office. Rigid foreign management must be relaxed and Canadian firms given more autonomy." The effects of foreign domination may have a more pervasive influence on management attitudes in general. "Our long association with experienced and capable foreign owners has served us well in the past and can continue to serve us well," Hart Products Co. president E. I. Birnbaum told a recent meeting of the chemical economics division of the Chemical Institute of Canada. (Hart is a relatively small producer of surface active agents controlled by Britain's Lever Brothers.) "But it has tended to make us timid and dependent. Like children of wealthy parents . . . we have become so accustomed to borrowing our ideas from others whom we regard as more competent than ourselves that we lack confidence in our ability to face a harsh world without someone standing beside us holding our hands. This is a state of mind we must abandon. We are more competent than we realize. We must have the courage to learn by making our own mistakes." Most Canadians, to be sure, have welcomed the influx of U.S. capital that has built their chemical industry. They have reaped substantial benefits from U.S. investment. They have lacked the capital needed to build the industry themselves, at least at so fast a rate. Despite their reputation for speculating with mining claims, moreover, Canadians traditionally have been conservative investors, little inclined toward risking their hardwon savings in new industrial enterprises. Foreign
Domination
Managers, especially absentee managers, are unlikely to win popularity contests among the people they manage. Canadians are sensitive about the fact that the ultimate voice of authority for much of their chemical operations and sales efforts lies in New York, Wilmington, St. Louis, or Midland, Mich. Little wonder, then, that many would like to see the Americans
Research. Some Canadian chemical managers feel that research is necessary to develop a truly Canadian industry. Shown here is CIL's analytical lab in McMasterville, Que. pick up at least some of their marbles and go home. A detailed government report, published this past summer, shows that of 365 chemical corporations operating in Canada in 1962 nearly two thirds were controlled 50% or more by nonresidents. These companies owned about 75% of the chemical industry's assets and accounted for 80% of its sales. Half of Canada's chemical firms, with 60% of the industry's sales, were 95% or more owned by outsiders. British firms have a sizable stake; Imperial Chemical Industries, for example has approximately a 75% interest in Canadian Industries, Ltd. A smaller amount of continental European money, too, has been invested in the Canadian industry. Far and away the largest share of the industry, however, is controlled by firms headquartered in the U.S. Among the minority of firms controlled by Canadians themselves, only three rank among the major market contenders. Chemical products—almost solely fertilizers—provided about 28% of the $170 million in sales rung up last year by Consolidated Mining and Smelting. Polymer Corp., which is wholly owned by the Canadian government, had sales of $114.3 million in 1964. And Domtar Chemicals ac-
counts for about 15% of Domtar, Ltd.'s sales, which totaled $386 million last year. Adolph Monsaroff, managing director of Domtar Chemicals, believes that there are definite advantages—and no real disadvantages—in not being linked to a foreign company. Decisions are easier to get, he points out, and Domtar can use its own best judgment in making export policy, or, for that matter, in building plants abroad. Domtar, for example, is one of the handful of Canadian-based chemical producers which also operate plants in the U.S. (others include Consolidated Mining and Shawinigan Chemicals). Domtar has produced lime at Tacoma, Wash., since 1963 and now is building a $3 million unit at Ridgway, Pa., to produce iron powders for powder metallurgy. The only Canadian producer of metal powders, it sells nearly 50% of its output to the U.S. and other foreign markets. During the past few years, though, Domtar has put most of its expansion efforts into pulp and paper. Once it completes its current $100 million investment program for pulp and paper facilities, however, Mr. Monsaroff expects the company's expansion plans to place more emphasis on chemicals, especially inorganic chemicals. Part
of the current $100 million pulp and paper investment program, in fact, is for chemicals: chlorine-caustic and sodium chlorate plants at Lac Querillon, Que., largely to supply captive requirements. To promote greater Canadian participation in Canadian industry, the government revamped its tax laws in 1963. Companies with at least 25% Canadian ownership now can depreciate equipment bought between 1963 and 1966 at 50% a year, rather than 20%. In addition, the dividends they pay to nonresidents are subject to only a 10% withholding tax, rather than the 15% rate for nonqualifying corporations. Even so, there has been no stampede among U.S.-owned subsidiaries to sell a 25% share of themselves to Canadian investors. Reichhold Chemicals (Canada) dropped the voting rights from its preferred stock to qualify for the proper degree of Canadian ownership. CIL and Du Pont of Canada, both of which previously had almost a fifth of their equity in the hands of Canadian holders, last spring sold additional shares to bring the percentage to just above 25%. At the time of the sale, however, both firms insisted that qualifying for tax advantages was secondary to raising new capital for expansion. DEC. 13, 196 5 C&EN
117
A year ago, Union Carbide Canada, in the largest new common stock offering in Canada's history, sold off a $60 million, 25% share of its equity to Canadians. The company claims that the new government tax regulations were a factor, but not the dominant one, leading to the sale. According to Carbide Canada president John S. Dewar, the company had been considering such a sale of stock for several years to gain better acceptance by the Canadian government and public and to improve employee morale. With the stock market favorable and company earnings rising, the timing seemed perfect in 1964. The move also provided money to pay a dividend—Union Carbide Canada's first since its reorganization in 1954—
of $71.5 million to its U.S. parent, which previously had plowed back all its Canadian earnings for expansion. Despite tax advantages, other U.S.owned companies show little interest in selling shares to Canadians at present. Eventually, say some, it might be desirable to acquire a minority of Canadian owners—either to raise new capital, to repay part of the parents' investment, or because it might just be good business to be identified more with Canada. However, for the present they figure that private ownership is more attractive than the tax incentives that accrue to companies with 25% Canadian ownership. Most figure, too, that the chances of Canadians ever having a dominant
role in the ownership of their industry are very slim. Certainly Canadians are not likely to attain it through buying a minority 25% interest in companies now operating in their country. The prospects for new Canadian enterprise winning a niche in the highvolume, big-investment chemicals business likewise seem slight. Some industry analysts expect, in fact, that U.S. business will control even more of the industry in the next decade than it does today. Many small producers compete successfully in Canadian chemical markets, usually by sticking to specialty products and serving relatively small, discrete specialty markets tied to a handful of customers. As in the U.S., however, the trend in Canada is
Canada's Top 12 Chemical Producers Are a Diverse Lot CANADIAN INDUSTRIES, LTD.
POLYMER CORP., LTD. (Canadian 100%)
{Imperial Chemical Industries owns 74.5%)
government
owns
Headquarters: Sarnia Estimated 1965 sales: $115 million
Headquarters: Montreal Estimated 1965 sales: $235 million
Principal products: synthetic rubber and latexes, ABS resins, styrene monomer.
Principal products: industrial chemicals, ammonia, fertilizer, polyester and nylon fibers," polyethylene resin and film, paint, explosives, ammunition, coated fabrics. «Through Millhaven Fibres, Ltd., jointly owned with Chemcell. Leonard Hynes, president
E. R. Rowzee, president
DU PONT OF CANADA, LTD.
CHEMCELL (1963), LTD.
(Du Pont owns 74.8%)
Headquarters: Montreal Estimated 1965 sales: $113 million
(Celanese owns 57%)
Headquarters: Montreal Estimated 1965 sales: $187 million
Principal products: petrochemicals, cellulose acetate and triacetate flake and fibers, chlorine and caustic soda, calcium chloride, fabrics, polypropylene fiber, carpets.
Principal products: nylon, acrylic, and spandex fibers; industrial chemicals; polyethylene and nylon resins; cellulose and polyethylene film; explosives; coatings.
R. G. Beck, president
Robinson Ord, president
UNION CARBIDE CANADA, LTD.
J. S. Dewar, president
DOW CHEMICAL OF CANADA, LTD.
(Union Carbide owns 75%)
(Dow owns 100%)
Headquarters: Toronto Estimated 1965 sales: $141 million
Headquarters: Sarnia Estimated 1965 sales: $98 million
Principal products: organic chemicals; polyethylene, phenolic, and epoxy resins; industrial gases; food casings; ferroalloys and alloying metals; carbon and graphite products; dry batteries.
Principal products: chlorine and caustic soda, polystyrene, vinyl chloride monomer, organic chemicals, ammonia, packaging materials, plastic building materials, pharmaceuticals. L. D. Smithers, president
toward greater concentration. Some of the major firms have been aggressive acquirers of smaller businesses in recent years. As small, independent firms are swallowed by their larger competitors, they usually pass into foreign hands. Persistent
Dichotomy
The dichotomy in Canada's chemical industry persists. Fertilizer production, for example, continues to be based more on the economic utilization of Canada's resources than on demand by Canadian farmers. Consolidated Mining and Smelting (Cominco) is western Canada's largest fertilizer producer and exporter. Sued by farmers who claimed that
fumes from its smelter at Trail, B.C., were damaging crops across the border in the U.S., it was literally forced into the chemical business in the late 1920's when it began to convert sulfur dioxide in its stack gases into sulfuric acid. Lacking a significant local outlet for the acid, Cominco launched its fertilizer operation in 1931, using the sulfuric acid to produce phosphates and ammonium sulfate. Cominco now can make 700 tons a day of ammonia in plants at Trail and at Calgary, Alta. Its total fertilizer capacity is a million tons a year. Since fertilizers and fertilizer materials move both ways across the border largely free of duty, Cominco's operations are geared to the North Ameri-
can market as a whole rather than to Canada alone. Western Canada's demand for fertilizer has been relatively small, in fact, until just recently, and three fourths or more of Cominco's output has been shipped to the U.S. Fai-mers in western Canada are becoming more conscious of the benefits of applying fertilizers to their acreage now, however. Their consumption is rising rapidly. They used about 500,000 tons during the 1964-65 fertilizer year and probably will consume a million tons by 1971-72, Cominco market researchers estimate. Last year 30% of Cominco's sales were in Canada. This year the company expects to sell nearly half of its output there.
Sources: Company reports; C&EN estimates
CYAN AM ID OF CANADA, LTD. (American 100%)
Cyanamid
ALLIED CHEMICAL CANADA, LTD.
owns
(Allied Chemical owns 100%) Headquarters: Montreal Estimated 1965 sales: $60 million
Headquarters: Montreal Estimated 1965 sales: $80 million
Principal products: heavy inorganic chemicals, organic intermediates, detergents, toluene diisocyanate, building materials.
Principal products: ammonia, urea, fertilizers, urea-melamine resins, plastic moldings and laminates, pharmaceuticals, industrial chemicals, lime, explosives. G. H. Elliot, president
S. R. Stovel, president
SHAWINIGAN CHEMICALS, LTD.
MONSANTO CANADA, LTD.
{Controlled by Gulf Oil)b
(Monsanto owns 100%)
Headquarters: Montreal Estimated 1965 sales: $75 million
Headquarters: LaSalle, Que. Estimated 1965 sales: $50 million
Principal products: ethylene and derivatives, other petrochemicals, polyvinyl chloride, polyvinyl acetate.
Principal products: polystyrene, vinyl, and ABS resins; industrial chemicals; adhesives; urethane foam; paint.
b Gulf controls one third through outright ownership and the remaining two thirds through its 67.8% interest in British American Oil.
J. R. Glatthaar, president
H. S. Sutherland, president
DOMTAR CHEMICALS, LTD. (Domtar, Ltd., owns 100%) Headquarters: Montreal Estimated 1965 sales: $70 million 0 Principal products: coal tar products, salt, metal powders, pressure-treated wood products, detergents, lime. c Includes some consumer products (detergents, bleaches, and related items).
A. Monsaroff, vice president and managing director
CONSOLIDATED MINING AND SMELTING CO. OF CANADA, LTD. (Canadian Pacific Railway owns 51 %) Headquarters: Montreal Estimated 1965 sales: $50 million" Principal products: ammonia, urea, fertilizers, sulfuric acid, chlorine and caustic soda. d
Fertilizer and chemical sales only.
J. H. Salter, vice president, western region
The West. Some Canadian chemical companies, like Cominco with its chemical complex (above) in Warfield, B.C., build their phnts in the West even though potential markets for most of the manufactured products are thousands of miles away In all of Canada, fertilizer consumption has been growing at an annual rate of 13% per year during the past five years, compared with an annual rate of only about 4.5% during the previous decade. Demand for nitrogen alone is showing an even faster expansion. In the past five years, Canadian farmers have increased their use of nitrogen at a rate of nearly 22% a year, roughly three times the growth rate during the previous 10 years. This rapid acceleration of demand is largely a process of catching up with other advanced agricultural nations, however. Although farmers in areas of intensive agriculture, such as southern Ontario, long have used large amounts of fertilizer, those in the prairies until recently have relied primarily on the natural fertility of their soil rather than synthetic plant foods. Per capita consumption of fertilizer in Canada is only about half that in the U.S. In 1963, Canadian farmers used only about 17 pounds of fertilizer per arable acre, compared with a consumption of 54 pounds per acre in the U.S. and 62 pounds in western Europe. The surge in fertilizer demand, coupled with ready availability of gas and low-cost sulfuric acid, has spurred expansion of Canada's capacity. When 120
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DEC. 13, 196 5
all plants now being designed and built are completed, Canada will be able to turn out about 2.5 million tons of fertilizer annually. Ammonia capacity alone will nearly triple. Obviously, then, Canada will have to look more than ever to export markets—and the U.S. remains the closest and richest outlet. The big question is whether the U.S., where a big build-up in capacity also is under way, can absorb the additional output which will be flooding southward over the border. Cominco moved to buttress its position in U.S. markets this year. It is building its first U.S. fertilizer plant— a $20 million, 200,000 ton-a-year facility at Beatrice, Neb., for making ammonium nitrate and nitrogen solutions. At least for the present, the new plant will purchase its ammonia requirements. Cominco also recently merged its Cominco Products subsidiary into its Cominco American subsidiary. Cominco Products, which was building the Beatrice plant, had been primarily a fertilizer warehousing and marketing organization in the U.S. Cominco American mines phosphate rock at two locations in Montana and is developing a lead mine, in partnership with Magnet Cove Barium Corp., near Salem, Mo. Despite growing competition, Com-
inco still sees its chemical future tied securely to fertilizer. (The company does get about 2% of its sales from chemicals such as ammonia, sulfuric acid, and the output of a chlorinecaustic plant at Trail marketed for nonfertilizer use.) "Our forte is heavy chemicals and mining," says sales vice president H. T. Fargey, "and we plan that our chemical business will remain centered primarily on fertilizer." Now Cominco is adding another string to its fertilizer bow. It is sinking $65 million into the development of potash deposits 25 miles southwest of Saskatoon, Sask. By 1969 it hopes to be producing 1 million tons of potassium chloride annually. When the mine is completed, Cominco will be the first Canadian-owned firm (Canadian Pacific Railway controls 5 1 % of its stock) producing all three basic fertilizer ingredients. Other mining firms have followed Cominco's path into fertilizer by converting waste sulfur dioxide fumes from their smelters into usable sulfuric acid in order to eliminate air pollution problems. One of the latest is Brunswick Mining, which is developing a $120 million ore concentrating, smelting, steel, and chemical complex at Belledune Point, N.B., on the Atlantic coast. The Brunswick Mining plant, slated for completion in 1967, will be able to turn out 840,000 tons a year of by-product sulfuric acid, as well as 250,000 tons of elemental sulfur, from smelting sulfide ores. Brunswick is also putting up a 1000 ton-a-day ammonia plant. Brunswick Fertilizer, a joint venture of Brunswick Mining and Electric Reduction Co., will use part of the ammonia and acid to make 640,000 tons a year of diammonium phosphate. ERCO already makes phosphate fertilizer materials at its Port Maitland, Ont., plant on Lake Erie; about half of its fertilizer output is exported to the U.S. Brunswick Fertilizer, sitting on a low-cost source of sulfur at an allyear port, plans to market most of its output in foreign markets, not just in the U.S. but in Latin America and the Far East as well. Potash Boom Canada's burgeoning potash business likewise is tied tightly to export markets. Buried 3000 to 7000 feet beneath Saskatchewan's fertile prairies are potash (sylvinite) re-
serves estimated to contain as much as 30 billion tons of ore, some of it twice as rich as ores being mined elsewhere. But getting it out is not for the fainthearted or the small-time operator. The way was led by two U.S. firms, International Minerals & Chemical and Potash Co. of America, who had the perseverance and the cash to sink shafts through the saltwater-logged Blairmore quicksand formation which overlays the potash beds at 1200 to 2500 feet. PCA opened its mine at Patience Lake (just outside of Saskatoon) late in 1958, but a year later had to shut it down while it was solving water leakage problems and rehabilitating its facilities. Reopened last spring, the mine now can produce 600,000 tons of potassium chloride a year. PCA's total investment so far at Patience Lake tops $40 million. IMC has been mining 3100 feet below the surface at Esterhazy since 1962 and now can dig 2 million tons of ore a year. By mid-1967, when a second shaft is completed six miles southeast of the first, it will be able to produce 1.5 million additional tons annually. The second shaft's capacity can readily be expanded to 2.5 million tons if demand warrants. IMC to date has invested $74 million in its Saskatchewan potash operations and it plans to spend at least $50 million more there. Kalium Chemicals, a joint venture of Pittsburgh Plate Glass and Armour & Co. which is the third of the present producers, took a different tack. Because its potash deposits at Belle Plaine, 30 miles west of Regina, are more than 5000 feet deep (Saskatchewan's Prairie Evaporites formation, 400 miles long and up to 100 miles wide, slopes to the southeast from a depth of about 2500 feet on its northern edge to 5000 feet at Regina and 7000 to 8000 feet on the U.S. border), Kalium worked out a process, previously deemed impracticable, for solution mining. It devoted seven years to testing and two years to pilot planting its process— the success of which hinges on dissolving a maximum amount of potassium chloride from the beds but leaving most of the accompanying sodium chloride behind—before starting commercial production a little more than a year ago. Kalium's $45 million venture now can turn out 600,000 tons of potash annually. At least five other would-be pro-
ducers now have firmed up plans to produce potash in Saskatchewan. Cominco is one. Others include: • Allan Potash Mines, a partnership of U.S. Borax and Homestake Mining together with Swift & Co., which is spending more than $70 million to produce 1.5 million tons a year 30 miles southeast of Saskatoon. • Noranda Mines, which is laying out $72 million for a 1.2 million tona-year operation 40 miles east of Saskatoon. • Alwinsal Potash, a $50 million French- and German-owned project scheduled to mine 1 million tons a year 60 miles east of Saskatoon. • Duval, which is spending $63 million to put up a 1 million ton-a-year mine and plant near Saskatoon. All these ventures will be conventional shaft mines. Although solution mining is the only practical way now of exploiting the deeper deposits, conventional mining apparently is more economic at the 3000- to 3500-foot level; conventional mines, at least at present, also benefit from more liberal tax treatment. The technology of solution mining is trickier, too, although several firms interested in mining the potash deposits, among them Southwest Potash, Imperial Oil, Domtar, and Duval, have investigated the technique. In addition to the eight firms already mining or digging mines in the potash fields, a score or more others have been probing and prospecting there. It is likely that at least another two or three actually will decide to sink shafts. Southwest Potash (a part of American
Canadian Industry Is Largely Foreign Owned Chemical Products Degree of Nonresident Ownership, 1962
Number of Corporations
95-100% 50-94.9% 0-49.9%
49.3% 13.2 37.5
Total Assets
Total Sales
Per Cent of Total
52.5% 23.9 23.6
60.1% 19.4 20.5
All Manufacturing and Mining 95-100% 50-94.9% 0-49.9%
20.2% 7.9 71.9
31.0% 27.3 41.7
32.3% 21.6 46.1
Source: Corporations and Labour Unions Returns Act Administration
Metal Climax) has plans to develop its large potash holdings near Bredenburg, for example, although American Metal's board has not yet given its final approval to the project. As one recent entrant puts it, "Now is as good a time as any to get into potash." At this stage in the game, though, a new player probably would have to ante up at least $50 million and plan to produce a million tons or more to win a competitive position. Even without further entrants, by 1970 when all the current projects are in operation the investment in Saskatchewan mines will be $500 million or more and output, practically all of it for export, will top 10 million tons a year—perhaps by a considerable margin—enough to supply a third of the world's total demand. It's a good bet, therefore, that potash may be in excess supply world-wide and prices under pressure for a while in the early 1970's. With the world's fertilizer demand on a strong uptrend, however, the excess should be short-lived. With most of Saskatchewan's output aimed at export markets, the impact of the potash boom on the rest of Canada's chemical industry will be minimal. The mines and refineries themselves are likely to employ between 3000 and 5000 workers. The Saskatchewan provincial government is hopeful that they may also attract secondary industry to the province. Armour already has put up a plant in Saskatoon to produce fatty amines for use as flotation agents. But unless some unexpected big new market for potassium-based chemicals opens up, chemical industry executives see little additional fallout from the potash industry affecting the rest of Canada's chemical operations. Petrochemicals in the West Canadian Chemical Co. is one producer which attempts to serve the Canadian market from a plant located close to its source of raw materials rather than close to its major customers. Its petrochemical complex just east of Edmonton, in the heart of Alberta's oil and gas fields, started production in 1953, before pipelines had been built from Alberta to eastern Canada. Products, including those added since 1953, include formaldehyde, acetaldehyde, acetone, acetic acid and anhydride, methanol, solvents, pentaerythritol, xanthates, and a host of other industrial organic chemiDEC. 13, 196 5 C&EN
121
Potash. The rich potash reserves in Saskatchewan lure big-time operators from the U.S., Europe, and Canada. At left, IMC's Esterhazy mine spews potash with a continuous mining machine. Cominco is sinking a test bore (right) for exploration at its property near Saskatoon.
cals, as well as acetate and triacetate fibers. The Edmonton plant was designed with a capacity for most of its products well in excess of Canadian demand, so sales abroad play a big role in its successful operation. Exports, largely to Britain and the rest of Europe, still contribute between 30 and 40% of Canadian Chemical's sales volume. It is the world's largest producer of pentaerythritol, for example, with a capacity of 30 to 35 million pounds a year. With Canadian consumption no more than 8 to 10 million pounds a year ( and a second producer, Shawinigan Chemicals, capable of making 5 million pounds at Varennes, Que.), most of Edmonton's output goes to foreign markets. Its biggest outlet, Celanese in the U.S., will disappear when Celanese completes its own 25 million pound-a-year plant in Texas next year. Alberta seemed a logical site for making petrochemicals a dozen years ago. But Edmonton's Canadian customers are 2000 miles to the east, which adds roughly 2 cents per pound in shipping costs to the price of its products, and the nearest ocean port is 750 miles to the west. Other firms at one time or another also have looked 122
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DEC. 13, 196 5
at the Alberta gas fields as a site for chemical production, but only CIL followed up with a plant; it completed a polyethylene plant in Edmonton in 1954, which five years later was expanded to a capacity of 50 million pounds a year. CIL concedes, however, that for today's markets its Edmonton plant is too small and at the wrong end of the pipeline to be very profitable. Now Alberta gas is more likely to be turned into petrochemicals in southern Ontario than close to the wellhead. Canadian Chemical insists, though, that it is not disenchanted with its Alberta site. The Edmonton plant has been expanded several times since it was completed, and Canadian Chemical currently is spending about $20 million on new capacity there. It is building a new liquid-phase oxidation unit to make acetic acid and anhydride (the original plant used a vapor-phase process) and Canada's first acrylate plant to supply monomer for paint resins. "If we had it to do over again, I think we would still locate at Edmonton," says Jack Langford, Canadian Chemical's friendly and relaxed president. "But I admit that it would require a lot more soul searching today."
Now, too, Canadian Chemical is moving east for the first time. Its plans to produce methanol at Cornwall, Ont., may mark the first step in building up a new organic chemicals complex, for it is unlikely that a $5 million methanol unit alone could support an economic operation. "A substantial portion of our major expansion in the foreseeable future will be in the East," Mr. Langford notes. It is in the East, in fact, that the drive to build a chemical industry with a Canadian identity is likely to be centered. In Ontario and Quebec live nearly two thirds of the nation's population. There, too, 80% of the country's chemical plants employ 90% of its chemical workers and turn out nearly 90% of the industry's output ( on a dollar-value basis ). Ontario alone accounts for 60% of the total selling value of the industry's products. Nor is any significant shift away from this eastern concentration likely soon; about 70% of this year's capital outlays are going into the two major eastern provinces. A significant merger in 1963 tied Canadian Chemical's chemical, fiber, and textile business in with the larger fiber and textile operations of Canadian Celanese. The resulting corpora-
tion, Chemcell (1963), Ltd., ranks about fifth among Canadian chemical firms in sales volume and is one of Canada's most profitable chemical and fiber producers. Last year it netted $10.6 million on sales of $96.7 million. Its earnings, before taxes, came to 21 cents per dollar of sales, the highest margin for any major publicly owned chemical firm in Canada; its pretax return on net worth was 22%. Canadian Chemical's Edmonton plant produces about one fourth of Chemcell's sales, in addition to supplying cellulose acetate flake and other intermediates to the company's fiber plants; only about 20% of Edmonton's output is for captive use, however. Emerging
Pattern
Chemcell, moreover, may exemplify the pattern that some other firms already are following and that more and more may follow in the future if Canada's chemical producers are ever to evolve in a way that is not merely a replica of the foreign companies that control them. Chemcell probably is Canada's most highly integrated fiber producer, with Canadian Chemical at one end producing petrochemical raw materials for acetate fibers and Canadian Celanese at the other turning out such end products as carpets and fabrics for upholstery and draperies. The company strengthened its position in textile markets last year when it acquired a 40% interest in Millhaven Fibres, Ltd., previously a wholly owned subsidiary of CIL. In CIL, Chemcell got a partner strong in fiber technology, both on its own and through its close ties with ICI in Britain—CIL has done pioneering work on polyester tire cord. Millhaven had been set up a few months earlier to take over CIL's 15 million pound-a-year polyester fiber plant; late in 1964 it started up a new plant capable of making 7 to 8 million pounds of nylon 66 a year; both plants, which probably will be expanded gradually in the next few years, are at Millhaven, Ont. (Courtaulds, Canada's sole rayon producer, started making nylon 6 last year at Cornwall, Ont.) Chemcell and CIL also set up late last year a 50/50 joint venture, CELCIL Fibres, Ltd., to market Millhaven's fibers, as well as acetate, triacetate, and polypropylene fiber made by Canadian Celanese. Chemcell and CIL both decided that partnership was the easiest way for them to
broaden their base in fibers, as both had long wanted to. By pooling their design and marketing skills, the two partners hope to carve out a bigger share of the market collectively than either could hope to capture alone. CEL-CIL will be able to offer its customers a wider range of products than any other Canadian fiber producer. The only important gaps in its product line are rayon, acrylic fibers, and spandex fibers (Canadian Celanese has developed its own spandex, but decided that the less-than-1-million-pound Canadian market could not support a second producer in competition with Du Pont's Lycra). The arrangement with CIL resembles, to some extent, the tie through Fiber Industries between Celanese and CIL parent ICI in the U.S. synthetic fibers industry. Fiber Industries supplies nylon polymer to Millhaven, although Millhaven plans to make the polymer itself eventually. Chemcell continues to have close ties to the U.S. Celanese owns 57% of its stock. Most of Chemcell's products and processes stem from development work Celanese has done in the U.S. Its major product lines parallel those of Celanese. Although it has no operation to match Celanese's plastics business in the U.S., Chemcell intends to get into that field, too. First, however, it wants to map a route that will carry it into an area not already overcrowded. This it hasn't been able to do so far. Still, Chemcell is not a mirror image of Celanese and it does not intend to become one. Canadian Chemical makes some products not produced by Celanese in the U.S., such as xanthate flotation reagents and acetonitrile. It struck out even further on its own last year with its acquisition of Western Chemicals, which makes chlorine, caustic soda, and calcium chloride at Two Hills, Alta. Now it is planning a second chlor-alkali plant at Edmonton to serve western pulp and paper producers. While it intends to remain basically a petrochemical producer, Canadian Chemical hopes to diversify its line even more by branching out into aromatics (most of its present organic chemicals are aliphatics) and by expanding its new inorganic chemical operations. "The biggest mistake a Canadian company can make is to merely duplicate its parent's operations," Canadian Chemical's Jack Langford insists. "Our business will
differ even more from that of Celanese in the U.S. as time goes on." And while Canadian Celanese's current expansion plans center firmly on fiber markets, such as nylon, polyester tire cord, and caipeting, president F. J. Fitzgerald likewise sees broader diversification somewhere down the road. One possibility: hard floor coverings, such as plastic tile, which compete with carpeting. Union Carbide likewise is beginning to move closer to the Canadian consumer at the same time that it develops product lines not matching those of its U.S. parent. "Our strength," says Jack Dewar, who was named president of Carbide Canada last July, "will come from trying to find products which are outside the scope of Carbide in the U.S.—products which we can market not only in Canada but throughout the world. In the next decade we hope to look less and less like our U.S. parent as we become more oriented toward our markets rather than our established products. In fact, this is what Canada as a whole must do, for it can't survive in world markets as a 'me-too' nation." Among Carbide's diversification steps that fit this pattern: its purchase this year of Becker Drilling, an Alberta manufacturer of drilling equipment; its acquisition in 1962 of a controlling interest in Milltronics, Ltd., an Ontario electronics firm; and its development of a new air-fuel jet chambering device for blast-hole drilling in open pit mines. Last year, too, Carbide—Canada's largest producer of polyethylene film—acquired two film converters. Carbide's most daring venture so far is its bid for a slice of the nylon fiber market. It is investing $5 million in a 6 million pound-a-year nylon 6 plant due on stream next summer at Arnprior, Ont., along the Ottawa River. The plant is designed so that it can be readily engineered for meltspinning other fibers, such as polyesters and polypropylenes. Carbide makes acrylic fiber but no nylon in the U.S. Why, then, did Carbide Canada pick nylon 6? "Because," says Jack Dewar, "synthetic fibers looked to us like a good field to get into. But the domestic market for acrylic fibers is too small and Du Pont already has it sewn up, while the nylon market seems to have the greatest growth potential and, in view of the technology we can get from Europe and the U.S., is the easiest for us to enter." DEC. 13, 196 5 C&EN
123
Carbide's move has some Canadian fiber producers both concerned and puzzled. While they grudgingly ad mire its courage in tackling the un familiar, they fear that in trying to carve out a slice of a business in which it has no previous marketing experi ence it will only further disrupt mar kets already suffering under price com petition from imports of low-cost Ital ian and Japanese fiber. One thing is certain: Canada's 60 million pound-ayear nylon market, until 1964 the pri vate domain of Du Pont, is being re shaped. The Urge to Diverge Others likewise are evolving product lines that differ from those of their foreign parents, often by edging closer to the consumer. CIL last winter ac quired Campbell Mfg. Co., a leading Canadian manufacturer of golf balls and other golfing equipment. The golf line ties in neatly with CIL's sporting ammunition business; mer chandising methods are similar while the seasonal pattern of demand is con veniently different. The move may presage further diversification for CIL into sporting goods and other recrea tional equipment markets. Monsanto Canada, unlike Monsanto in the U.S., makes flexible and rigid urethane foams, vinyl-coated fabrics, and industrial and trade sales paints. Jack Glatthaar, gray-haired and dy namic president of the Canadian sub sidiary, would like to develop more such items. "We are constantly seek ing new ways to be different. All Canadian subsidiaries should," he says. One way he sees Monsanto accom plishing this is by exploiting such con sumer products as garden chemicals and urethane foams and coatings. Forward not backward integration, he thinks, is the best road for growth. Allied Chemical Canada, although largely an old-line producer of heavy chemicals much like Allied in the U.S., got into the nonwoven fabric and car pet undercushioning business in 1962 with its acquisition of Smith Mfg., Ltd. Smith was acquired, however, not be cause the nonwoven undercushioning business looked like an attractive busi ness but because Allied hoped that it could be replaced with urethane foam. "We might diversify further away from Allied's traditional lines," says president George Elliott, "but first we must convince New York that we can do so profitably." 124
C&EN
DEC. 13, 196 5
Canada's Chemical Industry and Market Have These Dimensions Factory Shipments, 1964 (millions of (% of dollars) Total)
Industrial chemicals
$532
29.7%
Market, 1964 (millions of (% of dollars) Total)
$565
29.7%
Plastics and synthetic resins*
236
13.2
220
11.6
Pharmaceuticals and medicines
203
11.4
230
12.1
Soaps and cleaning compounds
184
10.3
200
10.5
Paint and varnish
182
10.2
190
10.0
Toilet preparations
90
5.0
94
4.9
Mixed fertilizers
79
4.4
70
3.7
Explosives and ammunition
68
3.8
69
3.6
215
12.0
265
13.9
Other chemical products
Note: The Canadian chemical industry, as defined by the Dominion Bureau of Statistics, ex cludes synthetic fibers, α Includes synthetic rubber. Source: Dominion Bureau of Statistics; Chemicals Branch, Department of Industry
Cyanamid of Canada has long made several products not produced by American Cyanamid in the U.S., among them calcium cyanamide, cal cium cyanide, and lime. Cyanamide and its derivatives account for a major share of the company's exports. More recently it has moved into melamine dinnerware. Cyanamid's tall and lanky president Sam Stovel sees good growth prospects in Canada for prod uct areas in which Cyanamid is not active in the U.S. and is convinced that research and development are essen tial for products made in Canada. He admits, though, that the company's major expansions in Canada will con tinue to depend on development work done in the U.S. Others are even less convinced that Canadian subsidiaries are likely to de velop along lines differing from the parents. "Because Canadian industry is so heavily oriented to resources, we will continue to have a product mix that differs from that of Dow in the U.S.," says Dow of Canada president L. D. Smithers, "and we may have a grow ing number of products not produced by Dow elsewhere. It is unlikely, however, that we will deviate greatly from Dow's world-wide pattern be cause our research and development efforts are so closely integrated." Dow, Canada's largest producer of
polystyrene, chlorine and caustic, gly cols, and chlorinated solvents, makes a few products in Canada not made by Dow in the U.S., such as extruded saran and polyethylene monofilaments and injection-molded products. For the most part, though, these have been picked up in acquisitions and are not very significant in the company's over all sales picture. Du Pont of Canada, too, has tended to closely parallel Du Pont's U.S. op erations rather than branch out on its own. "We see no particular advantage to bringing out products in Canada alien to what Du Pont makes in the U.S., and it would be difficult to sell such items to U.S. management," Du Pont of Canada treasurer Κ. Μ. Place points out. "In fact, there would seem to be a definite technical advantage in our staying close to items developed in the U.S." Another factor, of course, is that because Du Pont's product line is so broad, its Canadian subsidiary probably would find it difficult to come up with a line in which the parent company is not already involved. Unlike companies such as Chemcell, Dow, Union Carbide, and CIL in Can ada, Du Pont has made no big effort toward forward integration. Last year the company did enter the consumer paint market by acquiring Imperial Flo-glaze Paints, Ltd. Basically, though, it has stuck to a time-honored
Diversification. Carbide Canada, which makes polyethylene film at this plant in Lindsay, Ont., has been moving closer to the Canadian consumer
philosophy of not competing with its customers. It has no textile weaving, film converting, or plastics molding operations of its own, at least to date. Du Pont has done well with the product lines it knows best, certainly. When the present company was set up in 1954, following a U.S. antitrust judgment ordering Du Pont and ICI to separate their interests in CIL, Du Pont wound up with only two major product lines: nylon fiber and cellulose film. Since then it has plowed nearly $170 million into new plant and equipment and its sales have more than tripled—to nearly $190 million this year. Synthetic fibers still provide more than half its sales volume, but in addition to acrylic and spandex fibers it has added to its line polyethylene and polyethylene film, explosives, coatings, and a broad range of industrial chemicals. (CIL during the same period has invested a bit more on expansion, but its sales have only about doubled. ) Although Du Pont's profits probably will be down somewhat this year from 1964's $15.6 million, largely because of a 22-day strike at its Kingston, Ont., nylon plant, in recent years it has been one of Canada's most profitable chemical producers; last year it earned 38% before taxes on net worth, a return well above that of any other chemical firm in Canada reporting to
the public, and had a pretax profit margin of 19%. A Stake for Oil Refiners Canada's oil refiners have been considerably less aggressive in Canada's petrochemical industry than their counterparts in the U.S., perhaps because the Canadian market is more limited and is already controlled by several large, well-entrenched chemical firms. One problem in Canada has been the more restricted outlets for petrochemical by-products there, as compared to the U.S. or Europe. Most refiners, consequently, have been content providing hydrocarbon raw materials to the chemical industry rather than competing directly in chemical markets. This may be changing. Imperial Oil's ambitious petrochemical plans may blaze a trail for others to follow. Imperial, which is 70% owned by Standard Oil (N.J.), got its start in petrochemicals in 1957 when it completed a detergent alkylate plant at its Sarnia refinery. By the end of 1964, its chemical products department had invested $46 million in production facilities, almost all of it at Samia. Products include solvents, ethylene, propylene, butylènes, butadiene, benzene, toluene, xylenes, sulfur, mercaptans, and feedstocks for making carbon
black. Most of its output is sold to the chemical processors strung out south of Sarnia. Its ethylene capacity will be doubled to about 350 million pounds a year by mid-1967. Now Imperial is taking a second step by upgrading its own products. In the process, it is moving away from the pattern of Jersey Standard's U.S. chemical operations. It has just completed a $5 million acrylonitrile plant at Sarnia, the first to serve Canada's 15 million pound-a-year market (Cyanamid at one time had a pilot plant operating in Canada). It plans to make methanol in eastern Canada, probably adjacent to its Montreal or its Sarnia refinery, by 1967. It is also spending $5 million at Sarnia on a 45 million pound-a-year polyvinyl chloride plant due on stream early next year. While Imperial intends to remain primarily a producer of basic petrochemicals, at the same time it is strengthening its chemical position by moving into consumer markets. Last year it acquired Polybottle, Ltd., a Toronto blow molder of plastic containers, from Celanese. It also bought Building Products, Ltd., a major Canadian fabricator of building and related materials whose operations are increasingly based on plastics. Building Products provides Imperial with a captive outlet for vinyl resins in pipe, floor tile, and other end products. With its entry into the vinyl business, Imperial will run head on into Shawinigan Chemicals, at present Canada's largest and only fully integrated producer of polyvinyl chloride. ( Dow also makes vinyl chloride monomer; Monsanto and Goodrich produce PVC resin.) Shawinigan, too, is the one other major chemical producer in Canada tied directly to an oil refiner. Since 1963 British American Oil has owned two thirds of the company; Gulf Oil, which has a 67.8% stake in B-A Oil, owns the other third of Shawinigan. In recent years Shawinigan has shifted its base away from carbidederived acetylene to petroleum-derived ethylene. This shift coincided with a change in ownership from its former parent, power-producing Shawinigan Water and Power Co., to B-A Oil and Gulf Oil. Acetaldehyde, DEC. 13, 196 5 C&EN
125
Canada Imports More Chemicals than It Exports The U.S. is Canada's Most Important Trading Partner
Source: Dominion of Bureau of Statistics; CAEN estimates
which had been made from acetylene, now is produced by oxidizing ethylene and is converted in turn to an array of petrochemicals, among them acetic acid and anhydride, acetate esters, vinyl acetate, butanol, pentaerythritol, and 2-ethylhexanol, as well as to vinyl chloride. This fall Shawinigan started a $30 million expansion of its ethylene facilities at Varennes, Que., which, when completed by 1968, will give it a capacity of more than 600 million pounds of ethylene a year. The Varennes plant cracks naphtha from B-A Oil's Montreal East refinery to make ethylene. Cumene, also from B-A, feeds a Shawinigan plant which makes phenol, bisphenol, acetone, and acetone derivatives at Montreal East. Shawinigan sees much of its future growth tied to PVC, made at Shawinigan, Que., and converted by Shawinigan into a host of end products ranging from sheeting and wall coverings to tape and brush bristles. Canada probably will consume between 100 and 110 million pounds of PVC this year, about a third of it imported resin; demand is likely to grow by at least 10% a year for the next few years. But with present producers expanding and Imperial Oil coming into the market, the country soon will be more than self-sufficient. "What we are going to do with it all 126
C&EN
DEC.
13 r
196 5
is anybody's guess," admits one PVC producer. The most likely answer: a stronger push by all concerned toward converting resin into products for consumer markets. The Impact of Foreign Trade Canada's success in evolving an independent chemical industry hinges to a large degree on its foreign trade and tariff policy. Without the protection of tariff walls, many of its present operations—in organic chemicals, resins, and fibers—would have been stymied years ago. The Canadian chemical industry, like the nation as a whole, looks on international trade with a split mind. Exports and imports loom much bigger in the Canadian market than they do in the U.S. In 1964, for example, total exports of chemicals and allied products totaled $314 million, 15% more than in 1963. Exports accounted for nearly 17% of total factory shipments, up from nearly 16% the year before. Synthetic rubber, plastics, and fertilizers made up roughly two thirds of chemical exports. The U.S. is by far the best customer for Canada's chemical industry, taking about 4 5 % of its total exports in the past few years, nearly half in the form of ferti-
lizer. The United Kingdom, in second place, buying only 15% of the total. This year exports are expected to make another advance and probably will total close to $340 million. Expanded fertilizer and plastics capacity should feed the increase. Rising exports, however, have made little dent in Canada's deficit of chemical foreign trade. Du Pont economist R. B. MacPherson estimates that Canadian production supplies only about two thirds of the domestic market for chemicals. Last year, imports of chemical products increased by 11% to $454 million. The U.S. is clearly dominant as a supplier to Canada's chemical market. It is the source for about 80% of imported chemicals. It is not surprising, therefore, that Canadian chemical executives are sensitive about the high level of imports. The pros and cons of freer trade between Canada and the U.S. have been heatedly debated on both sides of the border almost since Canada became a nation nearly 100 years ago. Many people insist that some sort of a customs union or common market between the two countries is inevitable, sooner or later. Trade barriers separating two such similar markets, they argue, just don't make sense. Many Canadians feel that the logical trade routes in North America flow north
and south, rather than east and west, and that the resources of the continent cannot be efficiently developed until it is considered as a single great mar ket. The international boundary is an artificial barrier, they say, making little geographic or economic sense. Politics, not economics or geogra phy, poses the major stumbling block. The emotional and political overtones of tariff policy cannot be ignored either in the U.S. or Canada. Many Canadian businessmen are convinced that Canada must no longer rely as heavily as it has in the past on such resource-based industries as min ing, agriculture, and forestry. These no longer can supply enough jobs to keep adequately employed a labor force which is growing more rapidly than that of any developed nation in the world. Canada will have to find 1.5 million new jobs between now and 1970. One school of thought argues that this will be achieved most readily by paying more attention to domestic markets for manufactured goods rather than to for eign sales. "We must, to an increasingly greater extent, find markets for our high-pro ductivity industries," argues Du Pont's Ron MacPherson. "To trade wheat for electronics is the road to economic suicide." He insists that industry in Canada has been oriented too long toward export markets. This, he says, has held back the development of high-productivity industries and con sequently lowered the over-all effi ciency of Canadian manufacturing. His answer: greater tariff protection for industries with a strong technical base. (Proponents of free trade rea son, on the other hand, that free trade could benefit Canadian manufacturers by opening up to them the much richer and vaster markets below the border. ) Much of the Canadian chariness toward a common market with the U.S., though, stems from the Do minion's traditional ties with British and Commonwealth markets coupled with its long-held fear of the clasp, whether friendly or not, of its power ful neighbor to the south. Because of the great disparity in size between the two countries, free trade would lead to much greater and more costly adjust ments in Canada than in the U.S. Last winter the Canadian-American Committee, a group of business and labor leaders cosponsored by the Na tional Planning Association in the U.S. and the Private Planning Association
Foreign Trade Is an Important Factor for Most Companies Imports Exports for Resale Ver Cent of Total Sales Polymer Corp.
70%
0%
Consolidated Mining"
70
0
Cyanamid of Canada
35
15
Shawinigan Chemicals
25
5
Chemcell
25
5
Du Pont of Canada
15
15-20
Dow Chemical of Canada
15
15-18
Domtar Chemicals
10
5
13
13
«Union Carbide Canada Canadian Industries
7
10
Monsanto Canada
5
20
Allied Chemical Canada
0
10
α
For fertilizer only.
Source: C&EN estimates
of Canada, published a plan for a Canada-U.S. free-trade area. The plan is a cautious one, shunning any steps toward economic integration be yond reciprocal elimination of tariff barriers. It envisions that Canadian duties would be reduced more grad ually over a longer period than U.S. duties so as to protect the smaller Ca nadian economy during the difficult period of transition and adjustment. Even so, the committee took no stand on whether such a plan is feasible or desirable; the study, it insists, was made only to outline and clarify what such a plan might entail. Another tentative step toward freer trade was also made last winter when President Johnson and Prime Minister Pearson signed a free-trade program for automobiles. (The pact won Con gressional approval this fall; similar ratification was not needed in Can ada.) The agreement eliminates Canada's tariff of 1 7 1 / 2 % on new cars and up to 25% on auto parts made in the U.S. (but only if they are imported by auto manufacturers who are on a government-approved list; it does not apply to retail purchases by Canadians of U.S.-made cars). At the same time, the U.S. dropped its duties on Ca nadian-made cars. Canadian car man ufacturers (which primarily are sub sidiaries of U.S. firms) wanting to im port duty-free cars have made sepa rate agreements with the Canadian government to increase their output in Canada and to maintain the content of Canadian-made parts in their cars. The agreement, the effects of which are to be reviewed by the start of 1968, will permit car manufacturers to
better coordinate their operations be tween the two countries. Now they can concentrate on assembling fewer models in larger numbers in Canada. While some production now carried on in Canada will be shifted to the U.S., this will be offset by increased output of other models and parts. (Both General Motors and Ford are building new assembly plants in Can ada.) Canada hopes that its share of North American car output will in crease from 4 to 6CA. Prices paid by Canadian car buyers should be lower, too. The auto tariff pact, while backed by the auto manufacturers themselves, got a mixed reception on both sides of the border. Some Canadians claim that it will benefit chiefly the U.S.owned car makers. "Canada has been taken to the cleaners," says one econo mist. In the U.S., the United Automobile Workers voiced fears that jobs in the U.S. industry will be shifted to Can ada. Independent parts makers op posed the plan because they see them selves losing sales to imports of parts made by the Canadian subsidiaries of U.S. firms. Others claim that the bi lateral agreement violates trade agree ments the U.S. has with other nations. The pact is something of an experi ment. It could be highly significant if it sets a pattern for further tariff liberalization and industrial integra tion. Either the pulp and paper or the machinery industries may be the next target. The auto trade plan has won few cheers from Canadian chemical execu tives. Could such an arrangement be DEC.
13,
196 5 C & E N
127
extended to chemicals? Many execu tives doubt it. The automobile in dustry, they note, consists of a handful of firms, operating on both sides of the border and producing in each country products of similar design made from similar components. In the chemical industry, on the other hand, a great diversity of products is made by a large number of producers, many of whom have plants in only one of the two countries. Five years ago the Canadian Tariff Board began intensive hearings to de termine if the country's structure of chemical tariffs needs revision. In general, the chemical industry urged stronger protection for its products. The industry also asked for simplifica tion of tariff schedules and for the elimination of loopholes, ambiguous definitions, and inconsistent regula tions, such as those which exempt im ports going into certain end uses from normal duty payment. The longawaited report and recommendations of the board-Tariff Reference No. 120 —are expected to be issued early in 1966. Whatever the Tariff Board's con clusions, trade barriers are likely to be a continuing subject for argument within the industry. "Completely free trade between the U.S. and Canada would mean the end of our chemical industry," warns one industry spokes man, viewing with trepidation the big-volume, low-cost plants to the south. "It's impossible to put the two nations on a 50-50 footing. It would be no more satisfactory than making a steak and rabbit pie by only using one steer and one rabbit." Adds an executive of the Canadian subsidiary of a U.S. firm: "There would be no justification for us to exist as a separate company if trade barriers were eliminated. Any further expan sion of our facilities in Canada would be questionable. You can't compete against the U.S. with two-bit plants." Some Canadian executives, though, among them George H. Elliott, presi dent of Allied, and Jack Glatthaar, president of Monsanto, think that some sort of common market arrangement is inevitable eventually. In the long run, too, they believe, it would benefit the Canadian economy. Even proponents of free trade admit that such a move would have a trau matic impact on Canadian chemical producers. Severe dislocations and readjustments are bound to result. The blow would fall most heavily on 128
C&EN
DEC. 13, 196 5
producers of plastics, fibers, and some organic chemicals whose plants often are too small or too far removed from raw material supplies to be as efficient as their U.S. competitors. Many such producers might well fold up. "We would be living on borrowed time if we tried to maintain a market for our resin—except for specialty types per haps—in the face of free trade," one of Canada's largest plastics manufacturers concedes. On the other hand, pro ducers of heavy inorganic chemicals —materials for which shipping costs represent a significant part of their cost to consumers—probably would survive free trade with little or no damage. Free trade already exists for fertilizers, to all intents and puiposes. Some producers think, too, that their Canadian plants are well located to serve markets in the northern tier of states. They argue that free trade would expand rather than diminish their business. Shawinigan, for one, believes it could market such products as vinyl resins, vinyl acetate, acetaldehyde, and solvents in New England if it did not have to contend with U.S. tariffs. Monsanto Canada thinks it might be able to ship polystyrene to the north eastern states from its plant in the Montreal area if U.S. barriers came down. The complex of chemical plants in Canada's "chemical valley" south of Sarnia is well situated to serve the Detroit and Cleveland re gions. Canadian Chemical boss Jack Langford sums it up this way: "Free trade would be followed by a period of major readjustment for all of us in Canada. We might be swamped at first. But in the end I think we might gain more than we would lose. Ca nadian Chemical, for one, .probably could move more of such products as methanol and formaldehyde from Ed monton into the northwestern U.S. At the same time, certainly we recognize that we probably would have to re vamp our product lines drastically and perhaps stop making some products." One thing that Canadian executives fear, however, is that the changes in product mix which would follow on the heels of free trade would be based more on the decisions of absentee own ers than on the opinions of Canadian managers. And no matter what their attitude toward free trade with the U.S., Ca nadian executives must consider that prospect every time they plan an in
vestment. "We can't build a new plant without first figuring out how cheaply plants in the U.S. could make the product and ship it into our mar kets duty free," says one petrochemical firm. If a free-trade arrangement between the U.S. and Canada does come to be, all predictions regarding the future size and structure of Canada's chem ical industry are off. It's a good bet, though, that political considerations alone rule out free trade in chemicals any time in the foreseeable future. In any event, it is unlikely that the Canadian industry will shake off its domination by foreign owners, and its reliance on foreign technology. Does this mean that Canada cannot have a chemical industry it can call its own? Not at all. Old habits die hard, but gradually much of the indus try already has discarded its branchplant syndrome. Run by Canadianbred managers to make products tailored to Canada's growing trade at home and abroad, the Canadian indus try is likely to become more self-reliant and, in time, to lose its "not-made-inCanada" image.
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